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Infosys plans to reduce dependence on the US

Infosys plans to reduce dependence on the US
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First Published: Thu, Aug 30 2007. 12 09 AM IST
Updated: Thu, Aug 30 2007. 12 09 AM IST
Infosys Technologies Ltd, India’s second largest software and services firm, aims to reduce its US-generated revenue from the current 63% to 50% to spread its bets.
Infosys is targeting 30% of total revenue from Europe with all other regions accounting for 20%.
“It is an ideal situation for us and not a guidance,” clarified S. Gopalakrishnan, Infosys’ chief executive officer. And, “I am not committing any target date for that.”
Infosys shares fell 2.55%, or Rs48.05 a share, to close at Rs1,834 on the Bombay Stock Exchange. They are trading well off their 52-week high of Rs2,439 of 19 February. The Sensex rose 0.5% on Wednesday.
The reduction will also come naturally as Infosys is already stepping up investments in the European and other non-US markets.
The sharp appreciation of Indian rupee against the US dollar has been a concern for all information technology companies in India that generate significant revenue from sales to US customers. The rupee has appreciated about 7% against the dollar in the fiscal first quarter ended 30 June, which translates into lower rupee revenues for these firms whose shareholders are mostly in India. Infosys has already hedged $925 million at 40.58.
Infosys reported Rs3,773 crore as first-quarter revenue, of which 62.6% came from the US. Europe contributed 26.8%. The company posted 25% operating margins during the quarter.
In addition to the rupee’s appreciation, wage increases have also put pressure on the company’s profit margins. There have been around 13-15% annual wage hikes in India since 1997 with each increase having a 2.25-2.5% impact on Infosys operating margins.
The firm expects to compensate through better utilization of its staff time, higher billing rates to clients and finding more business in regions where currencies are more stable relative to the rupee.
Infosys had a 75% utilization level, or the number of employees used in billing clients, in the first quarter, a figure that it says can be increased to 79%. Infosys also sees the possibility of a 3-4% increase in billing rates for new contracts as well as a 2-3% increase in existing deals.
The company also said that its back-office subsidiary, Infosys BPO Ltd, has not faced significant problems from the subprime crisis in the US. The company said it has four clients who have exposure to the American mortgage business, which has suffered in recent weeks and months. Infosys BPO posted Rs200 crore in revenue during the first quarter.
Amitabh Choudhry, CEO of Infosys BPO, said that in a tougher environment, some outsourcing firms might try to win deals by cutting prices, but the market was big enough for everyone.
“You might see some deals happening at ridiculous rates, and I’m just hoping better sense will prevail and people will actually stick to the right rates,” Choudhry said.
Infosys also expects to benefit from any potential slowdown in the US economy. “Offshore models make sense even when companies are cutting cost,” said Gopalakrishnan. “In the past, IT services have eventually benefited from the slowdown.”
Gopalakrishnan said while the business environment was more positive in Europe, US clients were saying they would increase their offshoring budgets if the US economy slowed.
“From a geography perspective, Europe seems to be positive. Australia is also positive,” Gopalakrishnan said.
Shares in Infosys, whose clients include ABN Amro, Goldman Sachs and Airbus, have fallen 18.1% so far this year, underperforming the sector index, which has declined 14.6%.
(Charlotte Cooper of Reuters contributed to this story.)
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First Published: Thu, Aug 30 2007. 12 09 AM IST